Belief in the concept of rational markets is unlikely to survive long exposure to the turnaround industry. Give a turnaround professional 5 minutes and s/he can undoubtedly list any number of cases in which markets under/over-valued a company or security.
You could make the case that the turnaround industry only exists because rational market actors can disagree strongly on the value a company or the debt supporting it.
In a recent article Roben Farzad of Bloomberg Businessweek illustrates this point by discussing the latest egregious mispricing of a company: the case of AOL. AOL does not lack for coverage in the business press. The former 90s high-flyer that acquired, became an embarrassment to, and was spun-off from Time Warner has been receiving heavy coverage for at least the past 15 years.
The consensus view for the past several years has been that AOL is dead. The company’s once bright future squandered. All that was left was for CEO Tim Armstrong to recognise the inevitable and step down in favour of Arianna Huffington, a media-savvy talent that came along with AOL’s $315 million acquisition of The Huffington Post.
And yet, the market was wrong. Not necessarily wrong about the future trajectory of earnings, but wrong about the underlying value of AOL. Microsoft, it seems, looked at AOL and saw intellectual property that it would rather own itself; $1 billion worth of intellectual property, to be precise.
Markets are still nothing more and nothing less than the collective views of all market actors. And while we may pretend to be rational, and may occasionally succeed in at least being rigorously analytical, we have a tendency to fall into the trap of thinking in narratives.
The narrative for years has been that AOL was in the process of dying, and that there was no hidden value there. That narrative was wrong. The lesson the markets continue to teach us is that whatever the situation, no narrative should be accepted at face value, and that there is no alternative to doing your own due diligence.
About the author:
David Johnson is a partner with ACM Partners, a boutique financial advisory firm providing due diligence, performance improvement, restructuring and turnaround services to companies and municipalities. He can be reached at 312-505-7238 or at [email protected].